Northern Trust Reiterated Neutral - Analyst Blog

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We are maintaining our Neutral recommendation on Northern Trust Corporation ( NTRS ) based on the company's focus on initiating more new business with addition of both personal and institutional clients and assets. Moreover, the completion of acquisitions in 2011 provided Northern Trust with attractive clients coupled with new competencies that will drive future new business.

In July 2011, Northern Trust completed the acquisition of Omnium LLC, a leading hedge fund administrator, from Citadel. The acquisition of Omnium, which has around $70 billion in assets under administration, enhanced Northern Trust's capabilities and created an industry-leading hedge fund administration platform for institutional investors.

Previously, in June 2011, Northern Trust completed the acquisition of Bank of Ireland Securities Services (BoISS) from Bank of Ireland Group for €60 million ($82 million), announced in February 2011. Through this acquisition, Northern Trust combined the fund administration business with the existing activities in Ireland thereby providing outstanding consumer service and solutions to clients. The acquisition will improve and expand Northern Trust's Global Fund Service capabilities, particularly in the fund administration and ETFs. Both the acquisitions added $33.0 million in revenue in the third quarter of 2011.

Moreover, Northern Trust announced the expansion of its services in Australia in May. The company incorporated Unit Registry solutions to improve its fund administration capabilities in Australia. Northern Trust signed an agreement with Computershare to provide such services combining local expertise with a wide range of worldwide capabilities.

For supporting the new investment activities, management is taking steps to tackle expense growth and reinstate operating leverage to the business over the upcoming quarters and in 2012. Though, no specific guidance of cost management initiatives to control expenses was provided, the same is expected in early 2012.

In October 2011, Northern Trust reported third-quarter 2011 earnings of 71 cents per share, exceeding the Zacks Consensus Estimate by a penny. The increase was marked by higher net interest income and improved client network.

On the flip side, low short-term interest rates along with persistent narrow spreads at the short end of the yield curve continue to affect net interest income and money market mutual fund fees adversely. Therefore, net interest margin was stable but remained under pressure in the third quarter of 2011, and money market fee waivers were higher in the third quarter compared to the prior quarter. It is anticipated that NIM will remain under pressure in the upcoming quarters as Fed Funds target rate will likely rise in the beginning of 2013.

Moreover, credit quality is still a concern for Northern Trust at this point, though an improvement in the trend of metrics was recorded in the third quarter of 2011. Commercial and industrial loans improved but continued deterioration in real estate lending was recorded. Provision for credit losses, nonperforming assets and nonperforming loans decreased, as expected. However, weakness is still reflected in commercial real estate and residential real estate loans in certain markets.

The recent acquisitions depict the company's strong financial position. Further, we expect increased asset management and servicing fees on the back of equity markets improvement and higher volumes. However, numerous regulatory changes might thereby act as deterrents to the company's fundamentals.

Northern Trust currently retains a Zacks #3 Rank, which translates into a short-term 'Hold' rating. One of Northern Trust's peers - Huntington Bancshares Inc. ( HBAN ) also retains a Zacks #3 Rank.


 
HUNTINGTON BANC ( HBAN ): Free Stock Analysis Report
 
NORTHERN TRUST ( NTRS ): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: HBAN , NTRS

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